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State might have to borrow to pay bills next year

Minnesota finance officials say they're making plans to borrow money next year to pay the state's bills.

At a hearing Thursday, Minnesota's management and budget commissioner told lawmakers that if next month's revenue forecast shows bad news it will force the state to resort to short-term borrowing.

That could put Gov. Pawlenty in a difficult spot, given some of the things he's been saying about the federal budget.

For the past few months, Gov. Tim Pawlenty has been travelling the country campaigning for Republican candidates, and raising money for his national political action committee.

In most of his speeches, Pawlenty has criticized President Obama and congressional Democrats for increased government spending and borrowing. Here's what he said last Saturday in Iowa.

"Are you embarrassed when the Secretary of State of the United States is over in communist China on rhetorical bended knee, pleading with the Chinese to buy our debt because if they don't, the United States of America can't pay its bills?"

“If you don't do a whole lot of pre-planning, you can have a fiscal disaster on your hands.”

Rep. Lynn Carlson, DFL-Crystal

But now, Pawlenty is the one who may be forced to borrow to pay the bills. Minnesota Management and Budget Commissioner Tom Hanson told state lawmakers he's making plans for the state to borrow early next year, but won't know if it's necessary until next month.

"If the December 2 forecast is negative, we'll probably have to look at short-term borrowing," Hanson said.

The state was last forced to borrow to pay its bills during the budget crisis in the early 1980s. If it has to do it again, Hanson said it's likely the state's credit rating will be downgraded.

The executive director of the National Association of State Budget Officers said no more than 10 states are currently short-term borrowing in the open market. He said many more states borrow from their public employee pension funds to meet cash flow needs.

Borrowing money to cover the bills could deal a blow to Pawlenty's image as a fiscal conservative. The governor, who hasn't ruled out a run for the White House in 2012, has repeatedly praised his ability to keep a lid on spending and taxes during his two terms as governor.

In July, he balanced the budget on his own when he couldn't reach a deal with Democratic legislative leaders. Pawlenty cut spending and delayed payments to schools to erase a $2.7 billion projected budget deficit.

"They keep using the term, 'It's manageable,' and we keep finding out that there's weak points within that ability to manage," said State Rep. Lynn Carlson, DFL-Crystal.

Carlson said some state tax refunds to businesses have been delayed already. He said, however, that those payments should be made before the state is required to pay interest.

Carlson said he's worried about even bigger unexpected interest expenses if the state is forced to borrow.

"I'm very concerned, because I went through this in the early 1980s," said Carlson. "If you don't do a whole lot of pre-planning, you can have a fiscal disaster on your hands."

Carlson said the state would have to pay back any short-term debt within the current budget cycle.

Pawlenty declined an interview request for this report, but his spokesman issued a statement saying the state, unlike the federal government, has a constitutional requirement to balance the budget. He added that the short-term borrowing being discussed is different than what's occurring on the federal level.

But Pawlenty won't be on the hook to ensure that the state's budget is balanced. His term ends in January 2011, and the state's budget cycle ends six months later.